ESG is a big topic, encompassing many facets of investments: politics, society, the environment and the whole of humanity. Maybe, in fact, even the future of the human race. Some fund managers have a lot to add to the discussion. Schroders’ Jessica Ground is one of them.
On a visit to Australia last week, Jessica Ground told a briefing in Sydney that the importance of ESG issues, including to a survey, ranked only eight out of 10 of the top investor considerations. She is the London-based global head of stewardship for Schroders. The firm does two big studies each year – one with institutional investors and the other with direct retail investors. Investors have many wishes and some concerns. A common concern is whether they are giving up some performance if they engage the ESG path.
At an early morning meeting with journalists last Friday (July 12), Ground said: “At Schroders, we want every investment team across every asset class to meaningfully integrate ESG into everything they do.”
Australian investors and Australian voters, taxpayers and citizens generally, have a big problem with coal. “It’s an emotive issue,” Ground agreed. “A real challenge is the number of new coal-fired power stations which are going to come online, especially in the emerging markets, such as India,” she said. She could have added the challenge over the potential of five new coal mines in Queensland following the Adani Mine go-ahead. That decision has split the country. It’s the “latte-sipping folk in Sydney and Melbourne” versus the “rednecks” in Queensland or Western Australia. Or so it seems.
The latest institutional survey, conducted last year, which involved 650 big investors in 15 countries, showed that more than two-thirds believed sustainability would become more important. Europe led the way, as it tends to do on ESG matters, with 83 per cent, followed by Latin America, surprisingly, with 72 per cent, North America with 69 per cent, and then Asia with 68 per cent.
In terms of actual investments, European institutional investors have shown a 60 per cent increase in the past five years, followed by Latin America (44 per cent), North America (40 per cent) and Asia (33 per cent).
Drilling down to Australia, the latest survey found that 56 per cent of investors have increased their allocations to sustainable investments over the past five years and 70 per cent felt sustainable investing was more important than it was five years ago.
Ground said that investors had diverse views and that meeting all of the stakeholder views would be a challenge. And once you get past the more philosophical top-down view, implementation of ESG strategies and processes can be complex. Data providers across key investment areas – ranging from nuclear stocks through gambling, alcohol, fossil fuels, tobacco and weaponry – can provide widely differing exclusion lists.
And even simple exclusion screens can have unintended consequences, Ground says. Each of those key investment areas has a different impact on the characteristics of that asset sub-class in the MSCI World index.
A big deal when you delve deeper into the ESG space is what is included in the ‘S’. The ‘modern slavery’ laws and regulations in most countries, including Australia, have made a difference to investor thoughts about the forgotten letter in the ESG space. For a long time, the order, in terms of adding value to portfolios, has been ‘G’, then ‘E’ and then ‘S’ bringing up the rear. Maybe that is changing.
For instance, Ground told her Sydney audience that the abuse of opioids (prescription painkillers), especially in the US, has become a massive social problem. Apparently, about 70 per cent of heroin addictions are derived from an earlier abuse of opioids. And from an investment perspective, several drug manufacturers have been sued for their aggressive marketing. Those companies have been affected by fines and product restrictions.
There are also the recently highlighted ‘E’ issues regarding plastic bags, and, of course, climate change. Schroders has built a ‘Climate Progress Dashboard’ which tracks changes every three months. An interesting observation, Ground says, is that the damage caused by plastic bags has gathered increasing awareness, but, at the same time, the public’s concern about climate change seems to have declined.
“There will be huge winners and loser in the various sectors,” she says. “We are seeing greater economic losses due to climate change. We use an insurance model to assess this and we plot property, plant and equipment costs using that model… The oil and gas industry, especially in the emerging markets, is the most impacted.”
But, as she said before, it’s a complex subject. For instance, the aluminium industry is a dirty one, but it will be a part of the “solution”. Ground said: “Aluminium will play a big part in the de-carbonisation story. It’s a light-weight metal.”